SEC News Digest

Commission Announcements

The Securities and Exchange Commission today charged a former executive at Morgan Stanley with violating the Foreign Corrupt Practices Act (FCPA) as well as securities laws for investment advisers by secretly acquiring millions of dollars worth of real estate investments for himself and an influential Chinese official who in turn steered business to Morgan Stanley’s funds.

The SEC alleges that Garth R. Peterson, who was a managing director in Morgan Stanley’s real estate investment and fund advisory business, had a personal friendship and secret business relationship with the former Chairman of Yongye Enterprise (Group) Co. – a Chinese state-owned entity with influence over the success of Morgan Stanley’s real estate business in Shanghai. Peterson secretly arranged to have at least $1.8 million paid to himself and the Chinese official that he disguised as finder’s fees that Morgan Stanley’s funds owed to third parties. Peterson also secretly arranged for him, the Chinese official, and an attorney to acquire a valuable Shanghai real estate interest from a Morgan Stanley fund. Peterson was acquiring an interest from the fund but negotiated both sides of the transaction. In exchange for offers and payments from Peterson, the Chinese official helped Peterson and Morgan Stanley obtain business while personally benefitting from some of these same investments. Peterson’s deception, self-dealing, and misappropriation breached the fiduciary duties he owed to Morgan Stanley’s funds as their representative.

Peterson agreed to a settlement of the SEC’s charges in which he will be permanently barred from the securities industry, pay more than $250,000 in disgorgement, and relinquish his interest in the valuable Shanghai real estate (currently valued at approximately $3.4 million) that he secretly acquired through his misconduct. The U.S. Department of Justice has filed a related criminal case against Peterson.

“Peterson crossed the line not once, but twice. He secretly bribed a government official to illegally win business for his employer and enriched himself in violation of his fiduciary duty to Morgan Stanley’s clients,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “This case illustrates the SEC’s commitment to holding individuals accountable for FCPA violations, particularly employees who intentionally circumvent their company's internal controls.”

Kara Novaco Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit, added, “As a rogue employee who took advantage of his firm and its investment advisory clients, Peterson orchestrated a scheme to illegally win business while lining his own pockets and those of an influential Chinese official.”

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of New York, Peterson’s violations occurred from at least 2004 to 2007. His principal responsibility at Morgan Stanley was to evaluate, negotiate, acquire, manage and sell real estate investments on behalf of Morgan Stanley’s advisers and funds. He was terminated in 2008 due to his FCPA misconduct.

The SEC alleges that Peterson led Morgan Stanley’s effort to build a Chinese real estate investment portfolio for its real estate funds by cultivating a relationship with the Chinese official and taking advantage of his ability to steer opportunities to Morgan Stanley and his influence in helping with needed governmental approvals. Morgan Stanley thus partnered with Yongye on a number of significant Chinese real estate investments. At the same time, Peterson and the Chinese official expanded their personal business dealings both in a real estate interest secretly acquired from Morgan Stanley as well as by investing together in Chinese franchises of well-known U.S. fast food restaurants. Peterson failed to disclose these investments in annual disclosures that Morgan Stanley required him to make as part of his employment.

According to the SEC’s complaint, Peterson openly credited the Chinese official with helping obtain approvals required from other Chinese government entities for a deal to close. He wrote to several Morgan Stanley employees in response to an e-mail discussing the terms of one of Yongye’s purported investments, “Everyone pls keep in mind the big picture here. YY gave us this deal. ... So we owe them a favor relating to this deal. ... This should be very easy and friendly.” In another e-mail a week later, Peterson described “YYI” as “our friends who are coming in because WE OWE THEM A FAVOR.”

The SEC alleges that a Morgan Stanley compliance officer specifically informed Peterson in 2004 that employees of Yongye, a Chinese state-owned entity, were government officials for purposes of the FCPA. Peterson also received at least 35 FCPA compliance reminders from Morgan Stanley, but nonetheless committed the FCPA violations.

The SEC’s complaint charges Peterson with violations of the anti-bribery, books and records and internal control provisions of the FCPA, and with aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act of 1940. Peterson consented to a court order requiring him to disgorge $254,589 and relinquish to a court-appointed receiver the interest he secretly acquired from Morgan Stanley’s fund in the Jin Lin Tiandi Serviced Apartments. Peterson’s interest has a current estimated value of approximately $3.4 million. The proposed settlement is subject to court approval. Peterson also has consented to permanent industry bars based on the anticipated entry of the injunctions against him and his criminal conviction.

The SEC acknowledges the assistance of the Fraud Section of DOJ’s Criminal Division, the U.S. Attorney’s Office for the Eastern District of New York, and the Federal Bureau of Investigation. Morgan Stanley, which is not charged in the matter, cooperated with the SEC’s inquiry and conducted a thorough internal investigation to determine the scope of the improper payments and other misconduct involved.

The SEC’s investigation was conducted by David Neuman of the Asset Management Unit and Assistant Director Greg Faragasso, and the litigation was led by Richard Hong. (Press Rel. 2012-78)

Enforcement Proceedings

Commission Revokes Registration of Securities of Jove Corp. For Failure to Make Required Periodic Filings

On April 25, 2012, the Commission revoked the registration of each class of registered securities of Jove Corp. (stock symbol JVCP) for failure to make required periodic filings with the Commission.

Without admitting or denying the findings in the Order, except as to jurisdiction, which it admitted, Jove Corp. consented to the entry of an Order Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934 as to Jove Corp. finding that it had failed to comply with Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 13a-1 and 13a-13 thereunder and revoking the registration of each class of Jove Corp.’s securities pursuant to Section 12(j) of the Exchange Act. This Order settled the proceedings brought against Jove Corp. in In the Matter of Jove Corp., et al., Administrative Proceeding File No. 3-14813.

Brokers and dealers should be alert to the fact that Exchange Act Section 12(j) provides, in pertinent part, as follows:

No member of a national securities exchange, broker, or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security the registration of which has been and is suspended or revoked . . . .

In the Matter of Aaron M. Glasser

An Administrative Law Judge issued an Order Making Findings and Imposing Remedial Sanctions by Default (Default Order) in Aaron M. Glasser, Admin. Proc. No. 3-14790. The Order Instituting Proceedings (OIP) alleged that Respondent Aaron M. Glasser (Glasser) was permanently enjoined from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-5 on February 3, 2012, in SEC v. Aubrey, No. 8:11-cv-01564-JVS-RNB (C.D. Cal.). The Default Order finds the allegations of the OIP to be true and that it is in the public interest, pursuant to Section 15(b) of the Exchange Act, to bar Glasser from association with a broker, dealer, investment adviser, municipal securities dealer, transfer agent, and from participating in an offering of penny stock. (Rel. 34-66858; File No. 3-14790)

Commission Declares Decision as to Terry Harris Final

The Commission has declared the initial decision of an administrative law judge barring Terry Harris from associating with an investment adviser, broker, dealer, municipal securities dealer, or transfer agent. The initial decision found that following a jury trial, Terry Harris (Harris) was found guilty of six counts of fraud and two counts of registration violations. Harris was ordered to make restitution of $1,646,944, and is serving a twenty-five year prison sentence in the Limestone Correctional Facility in Harvest, Alabama. State of Alabama v. Terry Harris, CC 07-1624 (Ala. Cir. Ct. Feb. 4, 2011).

Terry Harris, formerly of Birmingham, Alabama, founded Wealth Builders International (WBI), he was also the CEO of a marketing company, Networkers 2000 (N2K), both of which were headquartered in Birmingham, Alabama. Harris was an unlicensed investment advisor selling unregistered securities in the State of Alabama. Neither he nor WBI or N2K was registered to conduct securities business in the State of Alabama.

Harris provided his investors with false financial profit statements that made it appear that he was making them money. He also misled investors as to his educational background and trading expertise. In reality, Harris was using the funds derived from new investors to pay dividends to earlier investors. By March 2003, Harris had approximately 1,767 investors and had amassed funds amounting to nearly $4.7 million.

The law judge found that by Harris raising at least $4.7 million from approximately 1,767 investors by fraudulent means over at least a ten-month period was egregious and recurrent. She also found that Harris has shown no remorse, nor has he made any of the restitution ordered by the court. (Rel. IA-3401; File No. 3-14610)

The Securities and Exchange Commission today announced a settlement in a $32 million insider trading case filed by the agency last year against a corporate attorney and a Wall Street trader.

The SEC alleged that the insider trading occurred in advance of at least 11 merger and acquisition announcements involving clients of the law firm where the attorney – Matthew H. Kluger – worked. He and the trader – Garrett D. Bauer – were linked through a mutual friend now identified as Kenneth T. Robinson, who acted as a middleman to facilitate the illegal tips and trades. Kluger and Bauer used public telephones and prepaid disposable mobile phones to communicate with Robinson in an effort to avoid detection. Robinson, now also charged, cooperated in the SEC’s investigation.

Bauer, Kluger, and Robinson each agreed to give up their ill-gotten gains plus interest in order to settle the SEC’s charges. Those amounts under the terms of their consent agreements are approximately $31.6 million for Bauer, $516,000 for Kluger, and $845,000 for Robinson.

In parallel criminal actions brought by the U.S. Attorney’s Office for the District of New Jersey, Bauer, Kluger, and Robinson have all pled guilty and are scheduled to be sentenced on June 4, 2012.

Acknowledging the facts to which they have admitted as part of their guilty pleas, Bauer, Robinson, and Kluger consented to final judgments in the SEC’s civil actions that are subject to court approval. In the proposed final judgments, Bauer would be ordered to disgorge $30,812,796 plus prejudgment interest of $859,135; Kluger would be ordered to disgorge $502,500 plus prejudgment interest of $14,010; and Robinson would be ordered to disgorge $829,129 plus prejudgment interest of $16,106. They also would be permanently enjoined from future violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. Each of the orders of disgorgement will be deemed partially satisfied and offset on a dollar-for-dollar basis by assets seized at the direction of the U.S. Attorney’s Office for the District of New Jersey based upon orders of forfeiture.

Bauer also has agreed to settle a related SEC administrative proceeding by consenting to the entry of an order that would bar him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any offering of a penny stock. Kluger agreed to settle a related administrative proceeding by consenting to the entry of an order which would permanently suspend him from appearing or practicing before the SEC as an attorney pursuant to Commission Rule of Practice 102(e).

The terms of the proposed settlement with Robinson reflect credit given to him by the SEC for his substantial assistance and cooperation in the investigation.

Investment company act releases

Praxis Mutual Funds

Everence Community Investments, Inc.

A notice has been issued giving interested persons until May 18, 2012, to request a hearing on an application filed by Praxis Mutual Funds (Trust) and Everence Community Investments, Inc. (ECI) for an order to amend a prior order under: (i) Sections 6(c) and 17(b) of the Investment Company Act of 1940 (Act) granting an exemption from Section 17(a) of the Act and (ii) Section 17(d) of the Act and Rule 17d-1 under the Act. The amended order would permit the Trust to continue to invest in securities issued by ECI following the implementation of certain changes in ECI’s community development investment program. (Rel. IC-30042 - April 23)

GPS Funds I, et al.

A notice has been issued giving interested persons until May 21, 2012, to request a hearing on an application filed by GPS Funds I, GPS Funds II and Genworth Financial Wealth Management, Inc. for an order under Section 12(d)(1)(J) of the Investment Company Act of 1940 (Act) for an exemption from Sections 12(d)(1)(A) and (B) of the Act, under Sections 6(c) and 17(b) of the Act for an exemption from Sections 17(a)(1) and 17(a)(2) of the Act, and under Section 6(c) of the Act for an exemption from Rule 12d1-2(a) under the Act. The requested order would (a) permit certain registered open-end management investment companies that operate as “funds of funds” to acquire shares of other registered open-end management investment companies and unit investment trusts that are within and outside the same group of investment companies as the acquiring investment companies, and (b) permit funds of funds relying on Rule 12d1-2 under the Act to invest in certain financial instruments. (Rel. IC-30044- April 23)

Northern Trust Investments, Inc., et al.

A notice has been issued giving interested persons until May 21, 2012, to request a hearing on an application filed by Northern Trust Investments, Inc., et al., for an order to permit: (a) series of certain actively managed open-end management investment companies to issue shares (Shares) redeemable in large aggregations only (Creation Units); (b) secondary market transactions in Shares to occur at negotiated market prices; (c) certain series to pay redemption proceeds, under certain circumstances, more than seven days after the tender of Shares for redemption; (d) certain affiliated persons of the series to deposit securities into, and receive securities from, the series in connectionwith the purchase and redemption of Creation Units; (e) certain registered management investment companies and unit investment trusts outside of the same group of investment companies as the series to acquire Shares; and (f) certain series to perform creations and redemptions of Shares in-kind in a master-feeder structure. (Rel. IC-30045 - April 23)

Sunwest Rollover Member LLC

An order has been issued on an application filed by Sunwest Rollover Member LLC (Sunwest). The order under Sections 6(c) and 6(e) of the Investment Company Act of 1940 (Act) exempts Sunwest from certain provisions of the Act and the rules thereunder until the earlier of August 5, 2015 or such time as it no longer meets the definition of an investment company under the Act. (Rel. IC-30046 - April 23)

Securities Act Registrations

The following registration statements have been filed with the SEC under the Securities Act of 1933. The reported information appears as follows: Form, Name, Address and Phone Number (if available) of the issuer of the security; Title and the number and/or face amount of the securities being offered; Name of the managing underwriter or depositor (if applicable); File number and date filed; Assigned Branch; and a designation if the statement is a New Issue.

Amendments to the Registrant's Code of Ethics, or Waiver of a Provision of the Code of Ethics

5.06

Change in Shell Company Status

6.01

ABS Informational and Computational Material.

6.02

Change of Servicer or Trustee.

6.03

Change in Credit Enhancement or Other External Support.

6.04

Failure to Make a Required Distribution.

6.05

Securities Act Updating Disclosure.

7.01

Regulation FD Disclosure

8.01

Other Events

9.01

Financial Statements and Exhibits

8-K reports may be viewed in person in the Commission's Public Reference Branch at 100 F Street, N.E., Washington, D.C. To obtain paper copies, please refer to information on the Commission's Web site at http://www.sec.gov/answers/publicdocs.htm. In most cases, you can view and download this information by using the search function located at http://www.sec.gov/edgar/searchedgar/companysearch.html.